The world of indirect tax regime is fast changing with countries adopting new and more sophisticated measures and increasing use of technology to track business transactions. We outline some of these developments below.
Every day, billions of dollars of revenue are generated by digital sales, searches and services originated by companies with no people operating in the country where the user resides. A tax system still based on physical presence is going to miss out on all these cross-border transactions.
Governments are therefore seeking to bring sales, value-added tax (VAT) and other indirect taxes into the digital age by shifting the requirement for tax registration (nexus) from origination to destination. And the pace of reform is accelerating as the falls in tax revenues from physical transactions are compounded by the fiscal impacts of inflation, geopolitical instability and COVID-19 spending.
A flurry of new and incoming EU regulations provide a model for the practical application of the destination principle. It’s therefore being closely studied by other tax authorities worldwide.
At the forefront of the changes is the e-commerce VAT package, which has been extended to include all business to consumer “B2C” services and the supply of B2C goods in specific circumstances. Companies who are subject to the new rules now must pay VAT on goods and services in each of the countries where they’re sold or used whether they have a physical presence there or not. Rather than being targeted solely at Big Tech giants, the qualifying threshold is just 10,000 euros in EU-wide sales for an EU firm and zero for companies selling into the bloc.
The e-commerce VAT package offers options to simplify the compliance burden. These include extending the mini one-stop-shop (MOSS) to a new union one-stop-shop that allows companies to register and report in a single member state of identification. While there are additional record-keeping requirements, this voluntary option would take away some of the headache of multi-state VAT registrations.
A broadly similar import one-stop-shop is available to firms selling into the EU, under which they only need to register in one state and report monthly on transactions from there. They can choose the state. But if they use an intermediary inside the bloc, the location for registration should probably be where this is based.
Further developments discussed during the webinar range from the review of VAT on financial services and new rules on head office to branch transactions to the possible introduction of standardised invoicing for intra-EU transactions.
The big shift in the U.S. was the Supreme Court’s South Dakota vs. Wayfair ruling in 2018, which overturned the physical presence requirement for state sales and use tax purposes. Since then, all U.S. states with a state sales tax have followed suit as they seek to recoup the tax lost through fall in shop sales and other bricks-and-mortar commerce.
The problem is that the scope, exemptions and filing requirements differ markedly from state-to-state and even county-to-county. This is also a fast-moving picture that demands continual review and update. New areas of commerce being brought into the net by some tax authorities include software-as-a-service operations.
Companies selling into the U.S. can find the patchwork of regulations especially puzzling. Many aren’t used to the scope and complexity of the business-to-business rules. Some might assume that their obligations are reduced by taxation treaties, but these only apply to federal taxes and exclude state-decreed sales taxes.
So, how can a business manage this rapidly increasing compliance burden? What comes through strongly from the webcast is that labour-intensive manual processes are going to struggle to cope. As the workload grows, the staff costs and risks of error will be unsustainable. At a time when competition for talent is ratcheting up, it’s also going to be harder to attract and retain personnel if they spend most of their day tied up in boring and repetitive entry input.
Software solutions are therefore likely to be essential, even for relatively small businesses. The move to at least partial automation is being given further impetus by regulatory requirements on the digitisation of VAT and sales tax.
The other key consideration is whether to develop and run the necessary capabilities in-house, outsource them or opt for a hybrid model that combines the two. In-house solutions offer a high level of control, but the software licensing costs, and other resource demands could stretch your organization. Outsourcing offers a cost-effective way to access the latest technology. But there are question marks over oversight, data quality and vendor management. The hybrid solution can offer the best of both worlds by transferring repetitive tasks to a third-party, while sharing oversight and control.
The key take-away is that the scope and complexity of indirect taxation is only going to increase. It’s therefore important to keep a close eye on developments and find agile and cost-efficient ways to keep pace.
